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Microsoft Raises $3.8B in Bond Sale
pfleming writes "Microsoft quietly, or not so quietly, raised some cheap cash in bond sales yesterday. For a company that already has a huge cash war chest and doesn't carry debt, what is the incentive to sell nearly $4 billion in bonds? From the article: 'Microsoft is sitting on $25 billion in cash, so the company doesn't need the bond proceeds "unless they have something big in mind," says Reena Aggarwal, professor of finance at Georgetown University's McDonough School of Business.'"
Obvious first idea.
German software company SAP appears to be a possible target.
While it may be true that they just want to buy something big (like politicians, judges, executive-branch officers) what if they merely wanted to show that they had X amount in debt for some other reason like taxes or some such thing?
They probably see hyperinflation coming, and they want to get into debt and buy something fast.
$25 billion seems like a lot, but it used to be more than that.
The important thing to note here is the trend, not the current value.
Given ALL the problems we see with corporations that carry debt, why on earth Microsoft would want to piss away a giant cash reserve AND borrow money...
Because debt is really cheap right now.
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No company sits on cash. They don't put it under a mattress. They invest it. If they are making 5% more in investing than the bonds cost, then why not borrow to invest? I've seen other huge companies borrow to invest, and there are whole classes of scam-sounding TV commercials about get rich quick with nothing down that are exactly that.
Other than that, there is no real reason to raise capital, unless they had an accountant that made them bid for cash against the investment opportunity and some $4 billion project decided to just borrow externally rather than get charged against a higher rate for taking internal money. But that's internal mumbo jumbo that just goes back to the initial point above, where it's being borrowed because the cost of bonds is lower than using the warchest. There exists nothing that could tap the entire cash reserve in a reasonably short enough time to justify bonds at this point unless they were buying Bolivia or something.
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Microsoft has a AAA rating. At this point in time, people are desperate for a safe place to park their money. Interest rates are low. Simply by holding onto it in cash now, they're betting they can make back the interest plus some later. And if deflation occurs, woo-hoo!
It'd be foolish not to borrow money given how cheap it is now, and how it's not likely to last at that level.
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Actually, Microsoft can probably get a pretty good deal on debt, considering how safe they are and how risky everyone else looks. This is a way to exploit an advantage they have right now, and they can wait for a chance to use it in the future. They must think that the interest on a bond must be cheaper than waiting (or waiting-and-spending-their-own-cash. since cash is a handy buffer and a hedge against risk in These Turbulent Economic Times (tm) and possibly worth it.)
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I'm guessing that Microsoft has about 4 dozen guys that know so much about finance, they would literally make you slit your wrists should you ever be matched up against them in a test of financial knowledge. Maybe, just maybe, they know what they're doing more than some random dude Slashdotting from work.
You know what else is cheap right now? Microsoft stock. Compared to last year, anyway (it's down a third)... and possibly compared to next year? They could invest in themselves: buy back company stock now while debt is N%, possibly leaving the (remaining) shareholders with a more-than-N-% return several years down the line when their stock rises due to other reasons.
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The why of this is fairly straightforward from a financial standpoint. Companies can raise money from two sources: Equity and debt. The cost of debt is obvious (the interest rate). The cost of equity is less obvious but very real: Investors demand a particular total rate of return on the money they invest in a stock, either in the form of dividend payments or retained earnings (appreciation in the value of the stock). If the total rate of return from your stock is less than what the market demands (based on its perception of how risky you are), then your stock price will fall until the desired rate of return is met. Typical long-term total return from the stock market is 9-10%, and for a tech company most investors will want more because of the perceived risk.
Anyway, the point is that when interest rates are low, it's a lot cheaper to get money from debt markets than from equity markets. So the smart CFO will borrow money and use it to buy back (and retire) stock. If you're a shareholder you like this in net, because although the company now has debt to pay back (a liability which decreases the value of your shares), the positive impact on value from having fewer shares outstanding outweighs it. The only downside to this strategy is that interest on debt must be paid back on a defined schedule -- bond holders aren't willing to defer their payoff like equity investors are (and consequently bond investors make lower returns on average). GM is an object lesson in getting squeezed this way. Many tech companies avoid long-term debt as a result; they don't like the ongoing obligation. If anything this move by Microsoft signals to the market that they've become a stable business that is confident in its long-term ability to generate cash.
Just so you know, big businesses are owned by "ordinary citizens."
So they wait until after Vista and in the middle of the recession? Is this a bet that Windows 7 somehow might not deliver like they want or need it to? I think they're looking to do something with the money, not sit on it for a rainy day.
"J.P. Morgan and Morgan Stanley led the bond sale."
http://www.marketwatch.com/story/microsoft-announces-first-ever-bond-offering
Sure, you can buy pieces on the secondary market. But that's true of just about anything.
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I'm guessing that Microsoft has about 4 dozen guys that know so much about finance, they know what they're doing more than some random dude Slashdotting from work.
Unlike Microsoft's marketing department...
MSFT can make more money investing its existing cash. Its the same kind of trade off an individual may make: Do I invest my money? Or pay down my mortgage? if you mortgage rate is very low, then it makes more sense to invest your cash.
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No matter how smart an individual man is, you get them into groups and they can collectively do a lot of stupid things. I mean, Microsoft also though that Microsoft Bob was a good idea.
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I'm guessing that Microsoft has about 4 dozen guys that know so much about finance, they would literally make you slit your wrists should you ever be matched up against them in a test of financial knowledge. Maybe, just maybe, they know what they're doing more than some random dude Slashdotting from work.
You could have said the same thing about Enron ten years ago. :)
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Just so you know, big business corporations are run by ordinary people like the old monarchies were run by ordinary people. There is no difference between kings and CEOs, archdukes and VPs, and the boardroom and the royal court, except that passing of the crown isn't automatically done from father to son. The King appoints people, based on connections instead of merit. They all vote themselves raises, work their serfs as hard as they can, and every once in a while a new fiefdom is formed that turns into pretty much the same structure. It's more just than a straight monarchy, but it's really not that different.
I hope that we shall crush in its birth the aristocracy of our monied corporations, which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country.
-Thomas Jefferson, Bedwetting Liberal
The same thing has been true since the beginning of time. When people pass on wealth to their descendants, you end up with a bunch of rich, clueless, greedy idiots running the show, who never serve but send people to war, who never starve but lobby for the destruction of welfare, and who never work but demand the end of Social Security.
Inevitably, the disparity of wealth and the skewed use of a nations resources to attend to the "needs" of these Hapsburg inbreds leads to a revolution, and then whole process is repeated. Corporations just allow us to pretend there isn't a monarchy. The fact that they are run by people doesn't prove anything.
I think you should replace some M with B in your comment ;)
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